Wealth And Asia Focus Will Reshape Earnings Power Over The Next Decade

Catalysts

About HSBC Holdings

HSBC Holdings is a global banking and financial services group with significant franchises in retail, commercial, wholesale, and wealth management across Asia, the U.K. and other key markets.

What are the underlying business or industry changes driving this perspective?

• Growing focus on Wealth and insurance, with fee and other income of US$2.7b in the quarter and invested assets of US$1.5t, positions HSBC to benefit if client demand for investment and protection products continues to expand. This can support fee income and earnings.
• The bank’s strong position in Hong Kong and Asia, including the intention to privatize Hang Seng Bank and confidence in Hong Kong’s outlook, creates room to align operations, simplify decision making and pursue cross selling in capital markets and Wealth. This can influence revenue growth and net margins.
• The build out of a large structural hedge of US$585b that is rolling onto higher yields, together with a strong deposit franchise of US$1.7t and ongoing guidance for banking NII of US$43b or better, highlights potential for resilient interest income. This can support net interest margin and earnings.
• Rapid expansion of Wealth and new customer flows in Asia, including US$29b of net new invested assets with more than half from Asia and over 900,000 new to bank customers year to date, shows HSBC is plugged into long term growth in cross border capital and rising affluent wealth. This can influence fees and profit before tax.
• Ongoing exits of non core activities, 11 announced so far this year, and US$1b of annualized simplification savings already identified, alongside a cost growth target of around 3% in 2025 versus 2024, point to a leaner operating base. This can support RoTE and earnings if revenues hold up or grow.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on HSBC Holdings compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming HSBC Holdings's revenue will grow by 10.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 33.1% today to 43.4% in 3 years time.
• The bullish analysts expect earnings to reach $37.1 billion (and earnings per share of $2.26) by about July 2029, up from $21.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $28.6 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 13.1x on those 2029 earnings, down from 15.9x today. This future PE is greater than the current PE for the US Banks industry at 9.7x.
• The bullish analysts expect the number of shares outstanding to decline by 1.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.32%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• HSBC is leaning heavily on banking net interest income, with US$11b in NII this quarter and guidance of US$43b or better for 2025. If the U.S. dollar rate curve becomes more of a headwind than management currently expects or if deposit growth slows across key markets, NII could fall short of expectations, which would directly pressure revenue and earnings.
• The group is concentrating more capital and earnings power in Hong Kong and Asia, including the intention to privatize Hang Seng Bank and a strong push in Wealth and Hong Kong commercial real estate. Any prolonged weakness in Hong Kong office property, muted corporate credit demand or softer nonresident customer inflows could restrict fee growth and keep credit costs higher, affecting net margins and profit before tax.
• Management is pursuing multiple exits of non core activities and reinvesting released costs into growth areas, while also targeting around 3% cost growth in 2025 compared to 2024. If execution on disposals, reinvestment and integration, including Hang Seng Bank, stretches the organisation or savings do not materialise as planned, operating expenses could run ahead of plan and weigh on RoTE and earnings.
• Wealth and insurance are positioned as long term growth engines, with fee and other income of US$2.7b in the quarter and invested assets of US$1.5t. These businesses are sensitive to equity markets, customer risk appetite and cross border flows, so any sustained market weakness or regulatory or tax changes that reduce demand for investment and insurance products could slow fee income growth and reduce profit before tax.
• Credit and legal risks remain a structural consideration, with an ECL charge of US$1b this quarter including exposure to Hong Kong commercial real estate and a US$1.1b provision related to Madoff litigation. Any further deterioration in commercial real estate, weaker counterparties in nonbank financials or adverse litigation outcomes could increase provisions and one off charges, which would lower net margins and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for HSBC Holdings is £17.37, which represents up to two standard deviations above the consensus price target of £14.44. This valuation is based on what can be assumed as the expectations of HSBC Holdings's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £17.37, and the most bearish reporting a price target of just £8.04.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $85.5 billion, earnings will come to $37.1 billion, and it would be trading on a PE ratio of 13.1x, assuming you use a discount rate of 8.3%.
• Given the current share price of £14.66, the analyst price target of £17.37 is 15.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.